Reconsidering the Labour Theory of Value

The Labour Theory of Value (LTV) is one of probably only a handful of economic theories, along with Francois Quesnay’s Tableau Economique, which have actually been completely abandoned over the past couple of centuries. So, in the interests of combating blind Whiggery, allow me to revive it (maybe I’ll do Quesnay another day, though here’s a sort-of modern version). I’m not going to argue the LTV is necessarily correct; I am merely interested in clearing up some common misconceptions.

My initial reaction to the LTV was the same as almost everyone’s: hostility. Why is there even a need for such a thing? Has it not been discredited on many fronts: logically, empirically, ethically? Are there not ways to preserve the important aspects of Marx, while at the same time ditching his dated and irrelevant theory of value? And yet, after a while, the hostility fades as you realise that:

You should never be hostile to a theory based only on its name and what other people have said about it, and

The theory, properly understood, is valid and highly illuminating, and explains many real world phenomena.

One common source of confusion with the LTV is the lack of appreciation that it only applies under capitalism, when goods are produced with wage labour, for the purpose of sale (this is what makes them ‘commodities’). For this reason it doesn’t apply to, say, artifacts; this blog post; or house work. This historical specificity can be a problem for economists, even heterodox ones, as they are generally wont to find principles which extend across different times and societies. This, for example, was the chief problem with Arun Bose’s critique of the LTV, which argued that no matter how far back you go, you will always have a commodity residue embedded in the value of a current commodity, and so labour is not the only source of value. Bose failed to consider that if you go back far enough, you will not have ‘commodities’ but simply naturally occurring objects, or objects not produced for sale. Only when labour was applied to these for the purpose of sale was ‘value’ created in the Marxist sense of the word.

In a nutshell, Marx’s theory goes as follows: under capitalism, the value of commodities is determined by the “socially necessary” amount of labour required to produce them (‘variable capital’), plus the current necessary cost of the capital used up in production (‘constant capital’). Fixed capital, such as machines, adds value at the same rate it depreciates, while raw commodities are used up completely and so add all of their value. Labour is generally paid less than the value it adds, and therefore is the sole source of profit.

Here’s a brief mathematical example: say an hour of labour adds £1 of value, and a certain type of chair requires 8 hours of labour (‘labour-time’), uses £2 worth of wood and depreciates a saw worth £10 by 1/10th (i.e. after the saw is used 10 times it will break). It follows that, according to the LTV, the value of this chair is:

(1/10)*£10 + (8*£1) + £2 = £11

The only way the capitalist can make a profit is to pay the labourer less than the value he creates (for the most part, Marx suggested wages were determined by a social subsistence level). So if the wage is, say, £0.50, the capitalist will have £4 worth of profit. Contrary to what many think, this does not imply that capital-intensive industries will have lower rates of profit, as the rate of profit will tend to equalise between industries, ‘sharing out’ the total surplus value produced in the economy.

The qualifiers of “necessary” costs and “socially necessary” labour are also important. It’s logically possible that a madman could purchase a saw for £100 for some reason, or that a lazy labourer could take 10 hours to make the chair, but this would do nothing to alter the resultant value of the chair. Marx was concerned with general rules, not specific cases, which could obviously fluctuate wildly as they are based on human behaviour.

The main implication of this theory is that, since capitalists tend to use labour saving technology to increase productivity, over time they use relatively more constant capital – which cannot be a source of surplus – and this drives down the rate of profit: the Tendency of the Rate of Profit to Fall (TRPF). Though the first capitalist who uses the technology will be able to sell at the market price, and thus gain, once the technology is widely adopted, the value of the commodity will decrease – a ‘fallacy of composition’. Again, this may not be true in particular industries at any one time, but it holds true across the economy as a whole. The result will be intermittent crises as capitalists face lower profits and try to increase them by pushing down wages, devaluing their constant capital, or through technological progress. Marx never predicted capitalism would collapse in on itself, though he did suggest that the working class would revolt as their wages were pushed down.

Does the subjective theory of value (STV) ‘refute’ the LTV?

The basic point that ‘value is in the eye of the beholder’ is often thought to be where the debate ends. This is surprising, because it has little to do with Marx’s main theoretical implications, which as I have noted, concerned economy-wide trends. Marx was well aware that price and value may differ wildly based on monopoly, demand and other fluctuations, but considered it irrelevant to his theory of value. He never claimed to be able to predict the day-to-day movements of prices, and purported attempts to use the LTV to do this are erroneous.

So while it may well be true that the tastes of rich people propel the price of diamonds upwards (whether this is due to the fact that they ‘subjectively value’ diamonds higher than poor people or the fact that they’re rich is up for debate, but I digress), but according to the LTV, this imbalance between price and value must be offset somewhere else, by some other commodity selling below its value. The important thing for Marx was the aggregate equality of price and value*.

Neither were Marx or the classical economists unaware of the utility of commodities and the array of use they might be put to: they called this the ‘use-value‘ of a commodity, though they did think this was socially determined rather than subjective. In classical economics, use-value is not quantifiable: a commodity either is a use-value or it isn’t, and there’s no definitive way to gauge the ‘value’ of sitting on a chair. This means it is not possible for use-value to translate into prices, as use-values are incommensurable between commodities.

The inherently intangible nature of use-value caused Marx and other classical economists to ask: what is it that makes commodities expressible by the same yardstick (money) under capitalism? The answer was that commodities had a twin expression of value: exchange-value. A commodity needed a use-value to have an exchange-value (i.e. it needed to be useful to be worth anything), but the two types of value were not equivalent or even on the same plane. The classical economists decided that exchange-value was determined not by utility, but by the labour required to make a commodity. This is because labour was the common element between all commodities: even capital ultimately reduced to labour, making it the prime candidate for the determination of exchange-value**.

In fact, the subjective theory of value is in many ways a fairly crude attempt to combine use-value and exchange-value, and doesn’t really offer anything new compared to the classical theory. The only way the quantitative expression of subjective valuation can be determined is either circular, ‘revealed’ by purchasing decisions ex post, or in the case of neoclassical economics, completely deterministic based on how a model is constructed. Therefore, as far as market prices are concerned, the theory doesn’t have any more predictive power than simply saying ‘use-value cannot be formalised’. Furthermore, though mutually beneficial trade is achieved through exchange of use-values, as far as exchange-values go trade is a zero-sum game: money exchanged must sum to zero. Neoclassical models of utility obscure this fact.

The ‘transformation problem’ and all that

Hopefully, I have cleared up some of the qualitative misconceptions surrounding the LTV. However, the critique which has probably done the most to ‘discredit’ Marx in academic circles is the idea that the maths simply doesn’t add up, usually based on ‘physicalist’ or Sraffian critiques (in fact, Paul Samuelson relied on this to steer his students away from Marx, despite rejecting Sraffian economics elsewhere). I will avoid the maths here and just try to get to the crux of the misconceptions, which is actually quite simple to do: once the basic methodological misinterpretations are highlighted, the purported complications simply disappear.***

In physicalist/Sraffian models, key variables such as prices and the rate of profit are all determined physically (generally by technology & distribution). The result is that the rates of value are superfluous and completely different to prices: when you try to ‘transform’ them, you run into problems. Yet this only really renders Marx logically inconsistent by interpreting him in a manner that…renders him logically inconsistent. For while physicalist models determine output and input prices simultaneously, Marx actually modeled them temporally, so they could easily differ. As the two prices depend on different transactions at different points in time, this is a fairly reasonable modelling tool by anyone’s standards, but it seems to have been lost in the wilderness of economic debate.

The root of this fundamental incompatibility is that the physicalist notion that key variables are determined simultaneously completely contradicts one of Marx’s premises: that value is determined by labour-time. Intuitively, this makes sense: in a simultaniest world that doesn’t really have time, how could the time spent labouring have any relevance? To show the inconsistency more rigorously, determination of value by labour-time implies that value will fall as productivity rises, which implies that the rate of profit will fall relatively in value terms compared to physical terms (more will be produced, but it will be worth less). Hence, the physical rate of profit – determined simultaneously by the parameters of the model (technology, distribution) – and the value rate of profit, determined by labour-time, differ, and physicalism is incompatible with Marxism.

Once we allow value to be determined by labour-time, and therefore allow output and input prices to differ, a myriad of supposed refutations of the LTV fail: the Okishio theorem; Ian Steedman’s Marx after Sraffa; V. K. Dmitriev’s labourless theory of value (unavailable online). The temporal method can also be combined with the ‘single system’ interpretation of the LTV, which suggests that instead of having two separate systems of price and value, as so many critics do, the two are linked: the necessary cost of inputs at the time of purchase is equal to the sum of the value transferred in production.

Thus, the most plausible mathematical interpretation of Marx’s LTV is the Temporal Single-System Interpretation, which I find a valid and illuminating way of modelling production. The basic elucidation of the theory, and the relationship between values and prices, simply becomes a lot less complicated, and the alleged ‘transformation problem‘ loses its venom as prices and values interact and adjust temporally.

Conclusion

There are a myriad of ways one can object to the LTV, but the idea that is is nonsensical and incoherent is simply based on misunderstandings. One may well disagree with the premise that labour is the source of value (I do, simply because I have no positive reason to believe it). One may also endorse alternative theories over the LTV. But, based on a clear understanding, there is no a priori reason not to develop a comprehensive understanding of Marx’s theory, and treat it in the same way one would treat any other theory in economics.

Footnotes

*It was these appeals to aggregates and totals, instead of the immediate behaviour of the system, that led Bohm-Bawerk to term Marx’s theory ‘tautological’. Yet this rests on Bohm-Bawerk’s own premise that money is neutral, which is controversial to say the least. In any case, Marx’s theory has clear, non-tautological implications, such as the TRPF.

**I find this explanation unsatisfying as labour as well as capital is heterogeneous. Marxists reply to this by arguing that labour under capitalism shares a common element: abstract labour, performed specifically to create commodities. This is partially convincing, but it doesn’t alter the main fact that different types of labour are highly disparate in nature.

Also – why does a saw have to sell for its value? Couldn’t it easily sell for more or less? Or is the assumption that the difference between the market price, the depreciation of capital, and the raw commodities must evidently be the labor value? What about the risk associated with running a firm?

“Also – why does a saw have to sell for its value? Couldn’t it easily sell for more or less?”

In general, the argument goes like this: Of course I could buy something for less (say, $5) than its [exchange] value ($10); but in this case the seller (let’s say, you) is losing. If you persisted stubbornly in doing so, you would eventually go broke and the price would converge to its natural price (roughly equivalent to equilibrium prices).

I won’t go into the other case. You can reason it yourself along similar lines, considering that a usual assumption in economics is free competition (when free competition is not assumed, then, just like in mainstream economics, there can be monopolies).

Your question, however, is somewhat surprising. After all, the reasoning used (as you’ll recognize in my attempt above, for instance) is standard since Aristotle’s Nicomedean Ethics and is still used nowadays by mainstream economists. If mainstream economists (I’m not suggesting that’s you case, btw) accept it themselves, why should it be a no-no for Marxists?

How does LTV take into account different “waiting times” in production processes ?

For example say a 1-year old whiskey and a 10-year-old whiskey take the same amount of labor and capital and the only difference is waiting time. These 2 whiskey’s would probably sell at different prices and Austrian theory explains the differences as due to different amount of interest due to the different waiting times. Does LTV have anything similar to explain this?

Additional question: You say that increased capitalization will cause the rate of profit to fall as the only source of profit is surplus labor. Won’t this same increased capitalization also increase the surplus labor provided by each worker by reducing how much labor is needed to maintain him ? Wouldn’t render the effects of increased productivity indeterminate in its effect of the rate of profit.

The marxist explanation of why the price of (good)wine grows with time is very simple: to guarantee his capitalist-owner a similar rate of profit as any other capiatlist. An enterely similar answer to the explantion of why automatized production process get similar rates of profit as any other production process without using living labour time

I think that the LTV can survive the explanation about the rate of profit getting equalized between industries independent of the level of capital used in particular branches. However once you extend that to include different amounts of embedded “waiting time” surely it become a labor+time theory of value?

These 2 whiskey’s would probably sell at different prices and Austrian theory explains the differences as due to different amount of interest due to the different waiting times. Does LTV have anything similar to explain this?

This is a good question. As far as I can see, the answer is that the value of the whiskey doesn’t change at all (except due to the labour/capital used in storing it) and the high price is merely a redistribution of surplus value, offset elsewhere. The rate of price-profit per year would be determined, as Max says, by the average in the industry.

Won’t this same increased capitalization also increase the surplus labor provided by each worker by reducing how much labor is needed to maintain him ? Wouldn’t render the effects of increased productivity indeterminate in its effect of the rate of profit.

You are presumably assuming increased productivity translates into lower wages relative to profit? It is true that this, and many other things, offset the TRPF: look at the last 30 years as wages have been held down while profits have gone up. However, as production becomes more capital-intensive, the proportional value that can be gained from this becomes smaller and smaller.

Karl Marx had the right framework to understand Capitalism but came up with wrong suggestions !
Marx was a unique philosopher and social scientist who had unfortunately a very limited understanding of positive economics.
Marx also lived in an era where perverse Capitalist societies as a result of the Industrial Revolution started to develop in their own unregulated and unrestricted ways.
so i don’t blame Karl Marx and his conceptual framework, because he lived in times when the ordinary coal mine workers in the UK had an average life expectancy rate of just 28 years-(Lowest since the Black Plague Disease spread all over current day UK )

I don’t really understand how this directly addresses any of Marx’s work. He didn’t make many positive suggestions, and the development of 20th C communism was something of a blank slate that must be understood in its historical context (eg a hostile world).

I also fail to see what you mean by his ‘understanding of positive economics’. He correctly saw through such distinctions as the positive/normative framework, and highlighted the hidden value judgments economists make.

Environment does influence one’s thinking sir!
So philosophical reasoning and the emergence of a thought process have got nothing to do with the external factors? remarkable.
Mark as you know moved to the UK. There he visited various Industrial Cities and saw exploitation of Labor at all levels. The Capitalist Industrialist and landowner classes abused and misused working classes. that is the point that I am trying to drive home …
Positive Economics is that branch of Economics which explains the subject and its theoretical models in purely scientific terms.
“It focuses on facts and cause-and-effect behavioral relationships and includes the development and testing of economics theories Positive economics as such avoids economic value judgements. For example, a positive economic theory might describe how money supply growth affects inflation, but it does not provide any instruction on what policy ought to be followed”.
source: (www.wikipedia.org/positive_economics)
Must remember that Karl Marx who had very limited understanding of Mathematical Economics and hardly any relevant training in the subject unlike other great economists such as Keynes etc. Hence he was not able to put his theory forward in real scientific terms! All of his historicist views and prognostications in modern times will not be entertained because they are not backed by any scientific method and were at best a pseudo science. So we need a little bit of econometrics to study and back test historical events in economics.
Marx didn’t do that or did he ?

So philosophical reasoning and the emergence of a thought process have got nothing to do with the external factors? remarkable.

When did I claim this?

Economists may well believe they have a purely positive approach, but it remains true that the areas they choose to study, and by which metrics they judge their performance, are normative. Economists like to think that they merely describe mechanisms and the value judgments are a separate matter, but the fact is that they are already there and implicit in the variables and mechanisms that are being highlighted. There is also generally the implicit notion that too much inflation and unemployment are bad, and that efficiency is good

Must remember that Karl Marx who had very limited understanding of Mathematical Economics and hardly any relevant training in the subject unlike other great economists such as Keynes etc.

First, Keynes had no formal training in economics. Second, it doesn’t matter. Which exact mistakes did Marx make?

Hence he was not able to put his theory forward in real scientific terms! All of his historicist views and prognostications in modern times will not be entertained because they are not backed by any scientific method and were at best a pseudo science.

He makes some clear, testable implications, such as the TRPF. I am forced to ask if you actually read my post or are just recycling a script that you have for when anyone mentions Marx?

First, Keynes had no formal training in economics. Second, it doesn’t matter.

Most of the celebrated economists don’t have a background in theoretical economics for that matter. Keynes was no exception. You need to learn maths (like Keynes did) before you want to learn or argue about economics.

Which exact mistakes did Marx make?

denying the very fact that all human beings have animal spirits and a selfish gene. They strive to become unequal and not equal to anyone.
would you like to become equal to another human being in any sense?

I am forced to ask if you actually read my post or are just recycling a script that you have for when anyone mentions Marx?

No I am just offering my two cents. If you don’t want me to contribute, just say so sir. By the way I am a former Marxist myself.

denying the very fact that all human beings have animal spirits and a selfish gene. They strive to become unequal and not equal to anyone.
would you like to become equal to another human being in any sense?

This is after you just endorsed a soft version of historical materialism. Btw, Marx criticised the hard version.

Also note that Richard Dawkin’s ‘Selfish Gene’ does not imply what you seem to be saying, and he has complained about people (right wingers) using it that way.

No I am just offering my two cents. If you don’t want me to contribute, just say so sir. By the way I am a former Marxist myself.

Dude, it’s fine to contribute but you just seem to be repeating a bunch of canards about Marx instead of engaging the actual post.

Marx was a prolific philosopher, extraordinarily well read and he spent a lot of time developing his framework. He may well have been wrong, but I consider it arrogant to suggest that he – or any other great thinker – made basic errors. I always work on the principle of charity.

“Must remember that Karl Marx who had very limited understanding of Mathematical Economics and hardly any relevant training in the subject unlike other great economists such as Keynes etc.”

While you are right to say that Marx had very little (if any) knowledge of mathematics and without meaning to devalue mathematics as a useful scientific tool, I cannot agree with the idea, seemingly implicit in your comment, that mathematics is a necessary condition to qualify a corpus of knowledge as science.

If it were, then Darwin could not be qualified as a scientist (his books are not mathematical, nor was he trained as a mathematician); nor could medicine be qualified as science.

Take biochemistry, for example. In the 17th century, Flemish chemist Jan B. van Helmont discovered that vegetable growth could not be explained as simple absorption of material from the soil. This and basically little more is what he found. He did not use any other quantitative technique, but weight measurements.

Van Helmont’s findings provided the basis for the study of photosynthesis. Should we conclude photosynthesis is not scientific as a whole, or just that its basis is not scientific? As an aside, VH’s is an empirical fact that can easily be reproduced experimentally (anecdotically, I did the experiment myself while in junior high school, when my own mathematical training was very limited).

As another example, Gregor Mendel, without being a mathematician, discovered the way hereditary traits (pea qualitative traits, like color and shape) are transmitted from generation to generation. He did that using nothing more than proportions. His experiments can be, and have been, replicated, and are considered science; the explanation he found is the basis for the notions of gene, alleles and zygoty.

I could point to many other examples (geology and physical anthropology/paleonthology and paleobotanics, come readily to mind), but I think the above are sufficient to make my point: mathematics does not seem a necessary condition to qualify a corpus of knowledge as a science.

“Hence he was not able to put his theory forward in real scientific terms!”

I have the feeling that you are leaving many things undefined and drawing from them conclusions that, at least to me, don’t seem warranted or at least at not at all obvious. For instance, what do you mean by “real scientific terms” or, indeed, “science”.

I suggest you clarify this before we proceed, or I fear any further discussion could end up being highly unproductive and frustrating to both of us.

with the help of science you are able to reproduce and explain something again and again. Natural Sciences and Social Sciences are different from one another.

But over the last fifty years, the subject of Economic Science has to be treated at par with any other scientific subject such as Physics, chemistry, engineering etc.

That may be a problem for both economist and social scientist who try to explain events using qualitative techniques and models.

I am also not in favor of studying historical events by ONLY using scientific methods, but I wont get far, as the majority would reject my research methods and claims.

Karl Popper probably is our best bet. Going by his standards we may accept Marx upto a certain level.

Because the more you refute the better the theory becomes in Social Science terms.

But again Does Marx qualify as a Qualitative Social Scientist? and was Marx trying to explain societal events and causes of change using “qualitative” Social Scientific Methods of Inquiry?
NO.

He was explaining Dialectical movements over history using the economic superstructure (the base) in a very scientific way.
Its like adding 1+1=2. and will always equal 2! Nothing else.
So we need to judge Marxist credentials on those strict lines.
Marx wanted his plausible explanation of societal changes and predictions to be treated as a science, then his work should also be judged using a strict scientific standards and methods of investigation.

Marx predicted that the workers of the world will unite! did that happen ?
NO IT DIDN’T.

Another Marxist claim was that Capitalism will collapse?
proven wrong again. In fact its a system which is accepted by all nations of the world with the exception of a few. countries.

Surplus value from Labor is extracted ?

Labor may not be well paid in certain countries but that cannot be accepted as a general statement or rule of thumb dumb theory of economics.

Scandinavian countries or many countries in South and North East Asia such as (Singapore, South Korea and Hong Kong etc.) or even in the Middle East pay exorbitant salaries to workers doing different jobs.

Even in Continental Europe the Labor is expensive which is hurting EU productivity. so who is extracting surplus value?
The real blood suckers are these labor and trade unions and their CBA’s (collective bargaining agents).

So please throw these Left Wing Ideas away!!
Labor shall remain a Factor of Production and someone has to extract their surplus value for a common good.

National Interests and state considerations come first!
we must protect the STATE and not any particular class.

Yes, Marx had limited training in mathematics. Thing is, though, he was also pretty much the autodidact’s autodidact, and so “training” doesn’t really give you a sense of his actual skill. In fact, in the final years of his life, he turned his attention towards calculus.

Being in England for the latter part of his life, it seems the breakthroughs of Cauchy and Weierstrauss hadn’t really caught on in his neck of the woods, yet. So, dissatisfied with the foundations of calculus in vogue at the time, he actually made his own attempts to rigorously found calculus — not on geometric grounds, but algebraic. Marx’s mathematical manuscripts, which were not made widely available until later into the 20th century, contain an original and quite interesting approach to the problem. Things were quite well established by the time it came to light, so it didn’t make much of a splash, though it holds some resonance for the nonstandard analysis crowd, apparently?

I’ve found two essays discussing the context and content of his mathematical work:

Despite not looking quite as pretty, I found the latter one to be a much more thorough and interesting account. Here’s a quote at length from it:

Although Marx’ Gymnasium certificate said that he had “a good knowledge of mathematics,” there is no evidence of further occupation with mathematics for 23 years. Then Marx wrote Engels on 11 January 1858: “During the elaboration of the economic principles I have been so darned delayed by computational errors that out of despair I undertook again a quick scanning of the algebra. Arithmetic was always alien to me. Via the algebraic detour, however, I catch up quickly” [MEW 29, 256]. Marx’ new interest in mathematics continued and he wrote Engels on 23 November 1860: “Writing articles is almost out of the question for me. The only activity by which I can keep the necessary quietness of mind is mathematics” [MEW 30, 113]. By 1863 he was well into his study of calculus, writing Engels on 6 July: “In my spare time I do differential and integral calculus. Apropos! I have plenty of books on it and I will send you one if you like to tackle that field. I consider it almost necessary for your military studies. It is also a much easier part of mathematics (as far as the purely technical side is concerned) than for instance the higher parts of algebra. Aside from knowledge of the common algebraic and trigonometric stuff no preparatory study is needed except general acquaintance with the conic sections.” [MEW 30, 362] …

We see from these letters that Marx was prompted to renew his study of mathematics in order to apply it in his study of political economy. By 1873, however, after searching in vain for a way to mathematically determine the principal laws governing financial crises (something his friend Samuel Moore thought impossible, but which Marx still thought possible “with sufficiently examined material”), he decided to give up the attempt “for the time being” [letter to Engels, 31 May 1873, MEW 33, 82]. But Marx continued to be interested in mathematics for its own sake, and most of his mathematical writings date from the last decade of his life, from 1873 to 1883. He was especially interested in the differential calculus, which he felt lacked an adequate foundation.

(The emphasis there is mine, just to point out the little-recognized fact that Marx was actually a pretty enthusiastic proponent of mathematizing economics. However, I expect he’d have pursued it more along the lines of an accountant than some utilitarian behavioral psychologist.)

His premise, surely, is that the pumping out of surplus labour from the direct producers has been going on for some considerable time but has taken different historical forms – slavery, feudalism, debt bondage etc. Capitalist surplus labour extraction is the current mode. This is the broad historical thesis which might, of course, be wrong.

The devil is in the detail. TSSI is situated in what I regard as a progressive reseach programme, starting with Dumenil and Foley (the new approach) followed by the simultaneous single system and the temporal single system interpretions. Along the way commodity money and the value of labour-power as the value of a worker’s consumption bundle were jettisoned. All to the good.

Completely agree about TSSI, has all the hallmarks of a progressive research program. I also think that many were right when they dismissed much of 20th C Marxism as degenerative, as it tried to rescue this or that part of Marx’s theory, or show that under certain circumstances the criticisms might be wrong. TSSI is as opposed to this approach as they are, judging by Kliman’s work.

“One common source of confusion with the LTV is the lack of appreciation that it only applies under capitalism, when goods are produced with wage labour, for the purpose of sale (this is what makes them ‘commodities’).”

Would the LTV apply and to what degree to a small market economy of self-employed artisans and peasants who own their own means of production (what Marx called “simple commodity production”), or to a more complex market economy of worker owned and managed co-operatives and interest free mutual-banks (Proudhon’s Mutualism)? Those would still have market exchange (and hence prices, values, competition, money, etc), but would lack “wage-labor” (and hence profits).

And if the LTV applies, would the tendency of the rate of profit to fall apply aswell?

I’m no expert, but my answer in both cases would be yes: self-exploitation is entirely possible, and Marx at times hinted that the capitalist is not necessarily some evil man with a mustache, but merely the personification of the system. A person or group of people who are trying to sell their products can pay themselves less than they produce in order to make a profit just as easily as a capitalist can. Yugoslavia, for example, experienced similar economic rhythms to capitalist countries. I sometimes think ‘market socialism’ should be called ‘worker capitalism’.

Marx argued that every society must produce a surplus in order to save and grow, what matters is how this surplus is obtained and managed. Capitalism is exploitative as those that produce do not get to own or manage the surplus they produce, it is stolen from them and accumulated for it’s own sake. Workers who own their own means of production do not have the same issue (how they manage their surplus is their own business).

Yugoslavia is a curious case, it was an attempt at market socialism but it was a small island of of State-owned but co-operatively managed enterprises existing inside a world of private Capitalism on one side and State-Capitalism on the other. It was not the same thing as Proudhonian Mutualism for one (Yugoslavia had no sign of mutual banks, occupancy-and-use property
rights or a Federation of co-operatives, and was still a very centralized system).

“I sometimes think ‘market socialism’ should be called ‘worker capitalism’.”

That’s a point Ludwig von Mises makes in his book “Socialism”, when debating the idea of market socialism being capable of solving his calculation problem. Many Socialists reject this as utter nonsense, specially since Market Socialism has been a tradition that existed from the very beginning with the Ricardian Socialists and has always been explicitly anti-capitalist.

In fact, even Marx himself rejected this:

“It is otherwise with capital. The historical conditions of its existence are by no means given with the mere circulation of money and commodities. It arises ONLY when the owner of the means of production and subsistence finds the free worker available, on the market, as the seller of his labour-power. And this ONE historical condition comprises a world’s history.” (emphasis added, Capital, vol. 1, p. 274)

“Political economy confuses on principle two very different kinds of private property, of which one rests on the producers’ own labour, the other on the employment of the labour of others. It forgets that the latter not only is the direct antithesis of the former, but absolutely grows on its tomb only.” (Capital, vol 1, chapter thirty three)

“Let us suppose the workers are themselves in possession of their respective means of production and exchange their commodities with one another. These commodities would not be products of capital.” (Capital, vol. 3, p. 276)

Of course Marx was no market socialist. He believed money itself had internal contradictions that could lead to the appearance of the M – C – M’ cycle (and hence, exploitation) even under simple production and as a dialectical materialist he believed that every historical moment is unique (and hence, any attempt to “roll back the wheel of history” into simple production would be impossible), but Proudhon’s mutual bank for one appears to solve the contradictions he saw in money (it keeps money in circulation with out charging interest, and thus with out M – C – M’) and the Mutualist program is progressive in nature and extremely different from the small cases of simple commodity production, so perhaps Marxist objections to market socialism aren’t as certain as most Marxists assume.

Marx argued that every society must produce a surplus in order to save and grow, what matters is how this surplus is obtained and managed. Capitalism is exploitative as those that produce do not get to own or manage the surplus they produce, it is stolen from them and accumulated for it’s own sake. Workers who own their own means of production do not have the same issue (how they manage their surplus is their own business).

However, if they are ‘forced’ by the market and competition to sell at a certain price, pay themselves certain wages and reinvest profits to expand or reproduce their organisation, the difference is only nominal.

“Let us suppose the workers are themselves in possession of their respective means of production and exchange their commodities with one another. These commodities would not be products of capital.” (Capital, vol. 3, p. 276)

Does he mean exchange them through money or directly? That could be the source of the disagreement.

so perhaps Marxist objections to market socialism aren’t as certain as most Marxists assume.

Perhaps not. I wouldn’t call myself a Marxist, and would disagree with Marx (judging by your quotes) here. It seems to me that the crucial question is whether things are produced for the purposes of sale using wage-labour, and whether workers have democratic control of organisations, they are state-owned or they are owned by a capitalist is actually subsidiary.

” Labor was the first price paid for all things. It was not by money, but by labour, that all wealth of the world was originally purchased. – Adam Smith ”

To my mind this is, as a starting point, irrefutable. Also, considering capital in the form of industrial machinery we have labor embedded in the machine itself, labor in it’s conception, design, and construction. We also see labor in the organizational efforts of the capitalist.

I find it difficult to cleanly separate ANY economic activity into the classic categories of labor and capital, and am left wondering if Marx’s division of class between owners and workers isn’t the key point. Both classes “labor”. However, the socially dominant ownership class has arranged the flow of the resultant surplus largely to their benefit.

Perhaps the difficulty here is with the reductionist, either/or form of the argument, not with the basic idea that human effort is the source of economic value and surplus.

I agree but as I say this labour is heterogeneous. Smith suggests that some labour may be worth more than others, but this then seems to belie the notion that labour is a ‘common yardstick’ to all commodites.

It means nobody has sat me down and said “look, here’s why labour is the source of value”.

I mean, you could equally have an ‘energy theory of value’ or a ‘knowledge theory of value’, since all commodities have these embedded in them, right? And everything ultimately reduces to energy (take a look at the post I link to as a modern-day descendant of Quesnay for more on this).

Rory: I believe nature is described as a source of “wealth,” not “value.”

UE: Any good discussion of the source of value should first begin with just as rigorous a clarification (or even meditation) on what we mean by “value” as can be managed; when the v-word enters the discussion, equivocation abounds.

If we get to the point where we say “value is the parameter underlying price and the motion of the broader system we call ‘economy,'” and we see that Marx has set that equal to “socially necessary abstract labor time,” then it appears our inquiry has grown into something much more like an empirical question. And to an extent, that was Kliman’s whole purpose in Reclaiming Marx’s Capital; not to prove Marx “right,” but to show that his political economy can’t be dismissed on a priori grounds due to any logical inconsistency.

Beyond that, the way forward seems empirical (which more or less lines up with what you and Krul were discussing on Twitter about this interpretation more or less clearing brush from the path). To that end, Kliman’s follow-up effort, The Failure of Capitalist Production, takes the theoretical perspective of Reclaiming and applies it to the US NIPAs.

By your reference to Proudhon, I suppose you are an Anarchist. I am interested on your views on the subject of LTV, as I’ve seen references (albeit vague) that many of the insights usually attributed to Marx were in reality first conceived by Proudhon. What do you think about this? Are there any references (preferably free and available online) to material on this? Thanks.

Many of the insights attributed to both Marx and Proudhon were at first conceived by the Ricardian Socialists (such as Hodgskin) and some Classical Economists (such as Sismondi). The theory of surplus-value for example, it is usually attributed to Marx (and if not him, Proudhon) but in reality it was a common theory among Socialist and radical circles for a long time before them, what both thinkers did was develop that theory much further. Marx actually cited Ricardian Socialists a lot, and never claimed to be the one to conceive the LVT, surplus-value or overproduction theory.

Sometimes in debates between Anarchists and Marxists, some people accuse Marx of plagiarizing Proudhon (or Marxists accuse Proudhon of being a “petty-bourgeois” thinker), but that’s just “politics” taking over actual reason. What the two thinkers had in common (the LVT, surplus-value theories, opposition to private property and wage-labor, class struggle, etc) was not originated by any of them, and in everything else their analysis was very different.

Marx and the Marxists did get some insights from Proudhon (the idea of an association between workers and working class self-emancipation), but both thinkers still made their own contributions and had a different analysis of Capitalism.

As for the LVT itself, it is a complicated subject. While it appears obvious to me that only human labor creates value (Capital itself being reduced to past-labor, Land requiring human labor to produce anything) and profits come from exploitation, to me it also appears obvious that Use-Values and subjective phenomena do also influence exchange and prices on a much deeper basis than what Marxists are willing to admit, and many specific claims made by different and more complex LVT’s (Marx’s tendency for the rate of profit to fall, for example) depend on a much more complex price-value theories that have premises i don’t particularly buy.

“What the two thinkers had in common (the LVT, surplus-value theories, opposition to private property and wage-labor, class struggle, etc) was not originated by any of them (…)”

Thanks. That, in my opinion, makes very good sense (I like to compare the alternative view – that a person’s thought emerges all of a sudden, fully formed, entirely independent from other thinkers – with Boticelli’s Aphrodite, which emerges adult and fully formed from a seashell: a beautiful and romantic legend, to be sure, but a legend, nonetheless) and it’s what I myself had come to believe.

Anyway, what of the Proudhon works, dealing more on the subject of LTV and surplus value, would you recommend?

Proudhon is a bit hard to read, his language is confuse; and actively participating in French politics of the 19th century he used polemic and “shocking” language often and doesn’t have any purely theoretical magnum opus on surplus value and the LVT like Marx does. But his most important work is “What is Property?: or, An Inquiry into the Principle of Right and of Government”, which is more of a philosophical and economic overview of what private property and the State mean to society.

“The System of Economic Contradictions, or, The Philosophy of Poverty” is another of Proudhon’s work that may be of interest. Marx wrote a reply that harshly criticized this book (“The Poverty of Philosophy”), and although Proudhon never published a reply (he wrote a lot of replies to Marx in his personal journals and in his copy of the book, but didn’t publish because the Revolutions of 1848 took all of his time), modern day Anarchists argue that Marx severely misrepresented Proudhon and many things he argued in this book were later repeated by Marx decades later.

“Property is Theft! A Pierre-Joseph Proudhon Anthology” edited by Iain McKay (prominent Anarcho-Communist and one of the main editors of the Anarchist FAQ) contains almost all of Proudhon’s major works and many minor works and interesting articles, together with a 50 page introduction with a bibliographic study of Proudhon and an analysis of the place for markets in the Anarchist movement, it’s the best place to go if you want to *really* fall into Proudhonism.

A good modern-day re-reading of Proudhonian economics is Kevin Carson’s “Studies in Mutualist Political Economy”. In this book he mixed Classical Economics with some aspect of Austrian-subjectivist ideas to re-state the classical LTV and exploitation theory, and he makes a historical analysis of the formation of Capitalism and the process of “primitive accumulation” to point out there was never any ‘free-market’ when it comes to how wage-labor and mass production formed. In an ironic twist of fate, Carson used Mises’s “calculation problem” to criticize Capitalism.

Yes, Carson’s argument is similar. He argues that large oligopolist corporations face the calculation problem, and in Mises-Hayek’s idea of economic calculation and information, a decentralized and co-operative economy would be more efficient.

Accounting in labour time is the most employed measure, everywhere. Fixed capital difficults this a bit. In my (humble) opinion the economic and social analysis in terms of labour values is valid in itself and does not need to be transformed. Transformation allows for a justification that prices differ from values but this is not to say that prices must prevail in the analysis. As a matter of fact, to compose a common rate of profit, some prices must be above and other below its value so as to permit such common rate and this fact (as Sraffa also noted and, thus, constructed a standard commodity) disturbs the normal economic accounting. Marx has his own way of creating a unit of measure: labour values that avoids this difficulty. So rather thana transformation, there is a connection between labour values ans prices. This connection allows for a combination of prices/rate of profit, that respect must labour values. This connection can be found becuse prices can be expressed only in terms of labour time and the rate of profit, and values can be expressed in terms of labour time.
So, no need of introducing real time as Kliman and Freeman do.

My explantion is atemporal, there is no difference in inputs and outputs prices according to their period. It is a logical time, rather than a time that evolves like in Freeman and Kliman. I prefer to analyze this option.

There are two systems, instead of one, but not every set of prices is valid; only the set formed with the value rate of profit respects that: (total or cumulated ) plus value and (total or cumulated ) profits are equal. The reality of value information is, thus, respected.

In parallel, we also know that the sum of prices (measured in wage units) less the sum of values, are the (total) profits, calculated with the procedure explained above (with the rate of profit in value terms)

Given the technique in use, how much more labor will be demanded if net output is increased by one more unit of a given commodity? This is the labor value of that commodity. I agree that accounting in labour time is widely used.

One thing he discusses is how some of the empirical defenses of the LTV, such as ones you link to, are wrong, as:

(a) They are from highly aggregated sources and may conceal massive value-price disparities in specific sectors.

(b) They are tautological, as both value and price have a common element: cost.

It’s interesting, because he is as critical of the non-TSSI Marxist approach as Popper, since it tries to pick and choose elements of Marx and ‘rescue’ it, resulting in incoherence and lack of true falsifiability.

“However, if they are ‘forced’ by the market and competition to sell at a certain price, pay themselves certain wages and reinvest profits to expand or reproduce their organisation, the difference is only nominal.”

I never seem to get the argument that “market forces” are authoritarian and hence, Capitalistic. Every economic system will have forces that make economic agents behave in certain ways. In a Communist planned or gift economy, if more of X is needed and hence producers of X must expand and make more, there will be institutions and social forces to drive the expansion of the resources and labor used to make X. Whether it’s done by a price mechanism, a planning board or vote doesn’t change the fact it exists.

What most anti-market Socialists don’t really grasp is that, with workers owning their own means of production, many market forces and incentives themselves *would change*. They conflate the Capitalistic market we have with all possible markets, with out putting much thought into how markets can work differently.

For example, Capitalist wage-labor is based on the M-C-M1 cycle of accumulation, the existence and the need to maximize this “M1″ requires constant expansion of production to exist. Since workers do not receive the full product of their labor, in order for all that is produced to be bought, Capitalists must fabricate demand by re-investing the surplus-value, expanding production even more (making the problem worse in the long term). This creates a “grow or die” economy, where production for the sake of production is the norm, and competitive pressures in the market are twisted to reflect that.

Mutualist associative labor, however, behaves differently. In a market of worker co-ops and full employment, there is no incentive to always grow on individual firms or on the system as a whole. In an equal-share worker co-operative the addition of more members simply means more people with whom the available pie will have to be equally divided — a situation that immensely reduces the incentive to expand. As the economy is based on a C-M-C cycle (workers produce something, sell it for it’s full value and buy something of equal value according to their needs), there is no need to fabricate demands or constantly re-invest in order to keep the system going.

Rather than force over-production, competitive pressures would make sure firms only expand if there is a social demand for expansion (an increase in the demand for X for example), and would make over-production and unnecessary expansion *unprofitable*. The Mutualist market would not be a “grow or die” one as a result, and workers would not be forced to lower their wages, expand production unnecessarily or increase working hours unless social demands require it.

I’ve seen Marxists lately have argue that market socialism is impossible because “Capitalism re-produces itself in production, not in exchange.” To me this seems the precise reason why market socialism IS possible, i can’t understand what exactly is their point.

This is a good comment, and has eased some of my opposition to market socialism. However, I am unsure about this part:

In a market of worker co-ops and full employment, there is no incentive to always grow on individual firms or on the system as a whole. In an equal-share worker co-operative the addition of more members simply means more people with whom the available pie will have to be equally divided — a situation that immensely reduces the incentive to expand.

So worker coops cannot change their size any significant amount? Or would the size be decided intermittently, politically perhaps?

“So worker coops cannot change their size any significant amount? Or would the size be decided intermittently, politically perhaps?”

They can, there is just a much lower incentive to do so, depending on how the co-op is structured. What is likely is that, if demand for one item is growing and current firms aren’t growing, *more* co-ops would form, creating a market centered on small and medium business (“small is beautiful”). If some work requires co-operation on a larger scale, co-ops can join together in a Federation, etc.

Depends on what you think is “unaccountable”. Markets definitely have flaws (externalities and natural monopolies being the most obvious one, even Neoclassicals recognize these), but in many ways and areas they do work well. Communist planned economies or gift economies can and will also have their own set of flaws, Socialists don’t explore them because experience hasn’t showed what they would be yet (except for the Soviet case, where the contradictions of authoritarian central planning were obvious).

Market exchange is a simple thing: You give something to another, receive other thing in return. No society will ever completely abolish market exchange, even if it only exists in a different, minimal or localized form. Similarly with competition: It will always exist in one form or another, and so long as it is not oppressive, oligopolistic or “rugged” competition, it is highly desirable it should.

“And surely it is not growth but competition for customers that ‘forces’ firms to self-exploit?”

The thing is that competition for customers can exist in different forms. Under Capitalism, the system must fabricate more demand and continually maximize accumulation just to sustain itself, so competition for customers assumes a “grow-or-die” form where firms have to be exploitative or, well, die.

As for Mutualist associative labor, so long as there is full employment, i don’t think there will be any incentive for anyone exploit himself. Competition would work maintain an “average” degree of efficiency in production and make producers have to offer something consumers want, but with out a need to always search for more customers and always accumulate more, there would be no need to self-exploit in order to survive in the market.

[And if you wonder if such an economy would remain in full employment, interest and in such an economy is abolished in practice (kept as 1/3rd of 1% or less to cover the costs of maintaining mutual banks only), land is free from speculation and landlordism (land ownership is based on occupancy and use or land-rent-sharing), and the mutual bank/mutual aid societies work as a large scale social safety net. This would make demand for labor be permanently high.]

1.) Technically, J.M. Keynes did have formal training in economics. He just didn’t finish the complete programme with Alfred Marshall. But it’s very clear in J.M. Keynes’s exposition that he absorbed much of what his teacher taught him very well.

2.) With regard to the labour theory of value…although Adam Smith isn’t discussed in the post, I thought I might want to share with people these posts by Gavin Kennedy.

I would tend to agree that Smith and possibly Ricardo did not subscribe to Marx’s thought as Marx was really the one who completed it and took it to its logical conclusion. Sadly, this logical conclusion had undesirable political implications and was subsumed by neoclassicism.

I never said that Adam Smith would have subscribed to Karl Marx’s analysis. I merely brought these posts along to show that the idea that Adam Smith advocated the LTV may actually be be nothing more than an incorrect reading of The Wealth of Nations by other scholars. Therefore, trying to argue whether the LTV is superior to the STV and vice-versa, is largely moot.

The reason that arguing whether the LTV is superior to the STV – at least the way I see things, and I could be wrong – is based on a false appeal to authority that is based on a misreading of Adam Smith’s Wealth of Nations that has been perpetuated by many economists. If a careful reading of Adam Smith’s book reveals that the LTV has explanatory power only up to a certain point in human society, and that this implicitly states that Adam Smith would not have been opposed to the STV, why are we arguing over this? I’m not saying that the LTV has no leg to stand on or no kernel to truth to it – it does. I’m saying that if a careful reading of Adam Smith reveals that he was never puzzled by the “diamond-water paradox” in the first place and merely was asking a rhetorical question, we’re no better than the medieval theologians who asked how many angels could dance on the head of a pin.

You didn’t mention competition.
In a competative market things sell for close to the cost of production. Which , minus the rent element of production is the cost of labour. In a non competative market things sell for what people the highest bidder values it.

Both cash flows are fixed. Wages are fixed after they have been agreed upon with the employee’s customer, the employer and the employers wages are fixed after the product price has been agreed upon with his customer, the consumer.
The employers profit is what is left after wages and costs
The employees profit is left after travel expenses and other costs.
So I say the questions are caused by giving arbitarily labels to cash flows and then trying to reconcile the questions that those distinctions create.

Wages also depend on demand. Demand for labour. In the economy there are only cash flows. Wages, Profits and Value are labels put on the same thing. So the question is where do prices come from, and prices come from a market. Without a market there is a calculation problem.

Good piece. Valuable disentangling.
I look forward to and request! a Quesnay piece as while I’m not a proponent of an “energy theory of value” I have noticed that most of the hand-waving mainstream defences of “free trade” use accounting systems that conveniently exclude both knowledge/technology and also increased exploitation of energy when explaining advances in GDP/wealth/etc.

I have read Kliman’s book, as well as Alan Freeman and other TSSI advocates. The links I gave predate Kliman writing his book.

I do not mind the development of the TSSI, but I think it misguided, at best. I’d like to see some TSSI advocates grapple with the Theory of Surplus Value. I do not find Marx critiquing his predecessors, especially Ricardo, from the standpoint of the TSSI.

I think I am fairly close to Vicenc Melendez-Plumed above, except I do not not need to pick and choose among Marx’s invariants. Basing myself on Sraffa’s standard commodity, I find the transformation problem no problem, at least in the circulating capital case.

Thank you for your comment.
Theoretically, an economy should produce – globally – new outputs in proportion to existing inputs (in a standard commodity situation) otherwise we would waste those outputs which would no be employed. In this case there is proportionality between prices and values.

If the economy is in another situation, in my opinion there are two things we can say, namely: first, that there is a precise relation between values and prices (measured in wage units) which consists in the sum of prices less the sum of values being equal to total profits, and, second, that the rate of profit in value equals the total plusvalue and the total profits. This rate is not the one that equals total value and total prices (measured conveniently).
It is thus possible to go from a value system, to a precise prices system, which however “has a contradiction” in the valuation of total plusvalue and total prices.

In terms of the Labour Theory of Value, I am surprised at some of the nonsense written about it. After all, all it states is that in the long-term prices tend to their cost of production. That is hardly difficult to disagree with (unless defenders of capitalism think capitalists sell at a lose if people subjectively value a commodity lower than the asking price!).

In fact, it is much superior to the standard mainstream position as the neo-classical perspective ignores such key things as production and time. The LTV is a theory of the dynamics of price over time for goods which involve production. The neo-classical theory is a snap-shot in time for the exchange of a set number of goods.

The “problem” with the LTV is that by concentrating on production it highlights the hierarchical and exploitative nature of capitalism. As Proudhon argued, the worker sells their labour and liberty to the boss who appropriates the surplus of labour and collective force their create (ironically, Marx mocks Proudhon in “The Poverty of Philosophy” for arguing this yet 20 years later the difference between the exchange value and use value of labour becomes the core of “Capital”!).

Also, in terms of LTV, here is an unfinished appendix of “An Anarchist FAQ” on this very subject:

I see a problem with the use of terms such as “value, “price”, “market price”, and “natural price” with the implicit assumption that these values can be narrowly defined and determined.

In actual commerce, however, we see a piece of couture clothing selling for thousands of dollars or a pair of name-brand sunglasses for hundreds, while at the same time a functionally identical item can be had across the street for a small fraction of what some are willing to pay for name-brand fashion.

It is clear that profit, except for the most basic commodities, has much more to do with social constructs than with any cut-and-dried theory of value.

Marx was right in his analysis of the SOCIAL imbalances in power and wealth between the ownership class and the laboring class. His and many others’ attempts to create mathematical rigor out of the relationship between labor and capital, value and profit are clearly failures.

I suggest we look to Thorstein Veblen’s ideas about the roles of pecuniary emulation, predation, conspicuous consumption and conspicuous waste when examining the social factors that make simple LTV or other theories of value an ongoing muddle.

I don’t think the existence of Veblen/positional goods in any way undermines the value theory in question, though? Things selling at a price above or below their value is pretty much taken to be the norm.

The proximity of the cheaper clothes to the more expensive ones is a nonissue, since they’re actually distinct use-values anyway; one jacket merely keeps you warm, while the other keeps you warm AND, perhaps more importantly, confers social status. Not that this necessarily impacts its value, in the Marxian sense of the word, but it does help explain how competition wouldn’t drive the name-brand jacket down to the price of the generic. It’s effectively utilizing a limited monopoly to charge a price high above value — like a rent.

Yeah, I agree with Hedlund – I don’t really think of Marx’s theory as a theory of price, but as a theory of surplus, profit and production. Positional goods are just redistribution of surplus and are entirely compatible with Marx’s analysis, though they themselves are also worthy of study.

Also, thanks for your comment Iain. Seems a lot of people are pointing out that Marx probably plagiarised Proudhorn.

I’m too lazy to check your archives, but I am wondering, have you ever tackled Ricardian/Malthusian rent theory on this blog yet? Because if you ask me, that is really the root of Marxian LTV. It is also perhaps one of the most dangerous ideas to come out of classical economics, and in many ways I think Marginalism and all this subjective value business was designed to avoid ever having to address rent theory in meaningful way. If you believe that all value is just subjective and that utility is only something that exists in the eye of the beholder(as opposed to their being objective utility as well as subjective utility) then you essentially have made it so that you never have to deal with the questions posed by people like Ricardo, because all economic activity emerging from the markets is seen as objectively equal in a sense. However, if you question subjectivism then you inevitably confront the unsettling conclusions of classical rent theory.

Even though Ricardo, Malthus and Marx all looked at it from different angles, and all had different explanations for what was occurring, they all were describing the same thing: an economy which is structured on price signals and comparative advantage inevitably leads to less sustainable, and less profitable ventures forming, and capitalism by its nature allows people to externalize these costs in the short run, such as externalizing onto workers(via lower wages and taking their labor), and temporal externalization(shifting the costs of present activity to some future date, like the unstable price patterns seen in bubbles, or anthropogenic climate change and other ecological problems), unsustainable, capital intense industrial practices which depend on a high market price of commodities to stay profitable (cough, fracking, cough), and over centralization of industries and lack of diversification for local economies which put them at risk of market shifts (ever heard of this city in Michigan called Detroit?). And this mechanism will inevitably reach a breaking point, creating business cycles which allow the wealthy to remain in control(when they can buy up the more profitable assets and ventures which have been driven into insolvency by a deflationary spiral), and for the cycle to renew itself and start all over again. And once you realize this, you have created a powerful argument against laissez faire capitalism, so powerful in fact, that it scares the crap out capitalists and will lead to them doing everything they can to hide it from people.

Neoclassical economics has gone out of its way to avoid having this conversation, and have decided to attack it by addressing the individual flaws in each rent theorist’s explanation for why it was occurring, Malthus was wrong about population growth, Ricardo was only focusing on agriculture, Marx’s labor value can’t translate into a workable way of accounting for value. However, I have yet to hear any adequate explanation for refuting this process as a whole, because there really is no valid way of refuting it. Ricardo, Malthus and Marx may have been mistaken of the explanations for why this was occurring, but the process they describe can easily be observed in the real economy, and is perhaps the best explanation for the business cycle. Anyways, if you haven’t talked about this already, I am curious to hear what you think about rent theory, since it is a topic which is right in line with the theme of this blog. If one is to say that objective utility exists, and I think it most certainly does, then the insights of Ricardo, Malthus and Marx do have some relevance, and we could learn a thing or two about what they are describing.

We and many others for many years been circling around the meaning of value, trying to find reasons why the injustices of the economic world leave some rich and others poor, some owning and accumulating and others laboring into indebtedness.

Economic rent is likely to be a much better place to look for the ratcheting that actually characterizes the market. Mainstream economics, always drawn to laissez-faire is most fond of the supposed perfections and pricing efficiencies of the market, and usually fails to answer the inevitable cruelties. Objective utility clearly does exist. However, arbitrary social constructs, tastes, and power relationships have as much to do with how “value” is expressed as anything, and the powerful will always find ways to extract “rent” from the rest of us.

Marx, Ricardo, and Malthus were perhaps looking at the same elephant in the dark?

“Marx, Ricardo, and Malthus were perhaps looking at the same elephant in the dark?”

I think that is probably true, as was Henry George, Sraffa and many others. I have been meaning to write an article on this topic on my own blog for quite some time. But I have been taking my time trying to build up a case, because as I mentioned earlier, the inability to identify a fully working proper mechanism and definition for this has allowed for it to come under attack for not being empirical or scientific enough. That being said, I find the notion of appealing to subjectivism to be a bit of a cop out, while I certainly think that subjectivity is required for individual actors to realize utility and value, I do think that it is absurd to say that objective utility does not exist, and even more absurd to say that it does exist and that we just can’t identify it.

Firms, households and governments try to make determinations of objective value all the time, whether it is from econometric calculations about the value of a given activity or simple cost/benefit determinations. Though there is certainly something about it that seems like we are merely fumbling in the dark, using our subjective determinations to be able to feel out these objects that we can’t see, yet we do know that they exist because we can feel them. However, just like feeling an object in the dark, one person may touch it and say it is a slipper, while another may touch it and say that it is a cat, and another may touch it and say that it is a sweater. We may not know what it is, or be able to agree on what it is, but it IS something. But even the hard sciences deal with this problem, and in fact all of science really is just using our own calculation methods to try to prove things that we may not be able to see, but we know exists (like gravity, we can’t see it, but we can see it at work).

If you ask me, I would say that it is something akin to Ricardo’s theory of marginal land. When a market opens up, the easy meat gets exploited first (like the oil reserves in Northwest Pennsylvania which were literally only about 30 feet beneath the ground and didn’t even need to be pumped out), then inflation sets in and supply and demand allow for other reserves to be exploited, like those that were 60 or 100 feet beneath the ground, and then ones that needed to be pumped out, and ones that had sulfur in it that required it to have a longer refining process. Price signals allow for those opportunities which require more input to be exploited and remain profitable.

Then, for whatever reason, an exogenous event causes a shift in markets, maybe new, easy to exploit oil fields are discovered, or a technological breakthrough alters the costs of a certain operation. And these exogenously induced paradigm shifts alter the profitability of all the opportunities involved, and may cause the opportunity cost to unexpectedly shift, which can make prior profitable activities to fall into the red. And once you take our finance system into account, if this shift is profound enough, it can lead to defaults on debts which seep themselves into the financial system and in the worst case scenario, it can cause debt deflation and a deflationary spiral which can alter opportunity cost in even more extreme ways, causing even those healthy opportunities to go into the red. And this of course allows for a fire sale where those with the most capital can essentially buy up the best opportunities at a very cheap price. The long term result is essentially that the most productive operations and assets will tend to remain in a small number of hands of those with the most money. And the people who join late in the game into the operations are left holding the bag. And if we look at our economies, it is overwhelmingly obvious that this is the case. The people with the most capital can survive, obviously given this the smartest way to save yourself is to be like Warren Buffet and buy and hold, but if you don’t have enough cash on hand to provide for the means of subsistence, you are essentially forced to sell at a loss just to get the cash needed. If you are above the threshold, you can be immune to business cycles, and weather out the storm, and procure even more assets and become even more wealthy and secure.

It is essentially the capitalist economic calculation problem, which is that people in a capitalist market are unable to properly predict opportunity cost because of unknown variables (like technological breakthroughs, or unforeseen banking crises). And because we are unable to properly determine opportunity cost, business cycles are all but inevitable, as well as the effect of business cycles, which is the accumulation of the most productive, profitable and versatile assets into a small number of hands from the fire sale. The bitter irony is that people like Keynes are demonized as shills for the state, when in reality fighting the business cycle is probably the biggest threat to the monied powers because it disrupts their sacred cycle and prevents the fire sale from being as deep. Though it would be preferable if we could avoid these things from happening in the first place. However, I still haven’t worked out an answer myself, if we have a rules based approach, I think this cycle is inevitable, but a discretionary approach has its problems too. Which is why an ability to provide an objective method of identifying these trends and putting a stop to them which can be incorporated into a rules based approach would be extremely helpful. But as I noted, that is easier said than done. Either way, its an exciting challenge for nerds like me to keep trying anyways.

Also, if objective utility didn’t exist, then why do we see differences in elasticity among commodities? Some goods obviously meet more needs than others and will be more inelastic. Clearly there is something more to it than simply subjective preferences.

Great analysis! I have not tackled it directly,sadly, but probably will at some point.

I actually recall how in my development classes the classical economists were called “the pessimists” while the neoclassical economists were more “optimistic” (as was Smith, actually). The neoclassical perspective certainly lends itself to a more optimistic outlook, mainly by glossing over or assuming away any real problems.

Subjectivism in its crudest form does strike me as a load of hand waving: “people buy what they buy because they value it at the price they buy it – look, you can see this from the the fact they buy it!” As I comment, as far as explanatory power goes, this ‘theory’ does not offer much more than the classical theory of ‘use-value’.

You know, I think you might like the Austrian (!) economist Ludwig Lachmann, who spoke a lot about how expectations are formed under uncertainty and the resulting capital structure is really just an accumulation of a series of guesses.

Utility exists. Objective, meaningful economic statements about utility will, however, always be limited to thermodynamics: How many Calories, kilowatts, gallons, and so forth.

When we attempt to make statements about utility in a money economy, we find ALL exchangeable goods are thermodynamically equal. One can always sell the Piccaso and buy a coal mine. This seems to a fundamental but largely unnoticed identity.

The better place to look for answers as to why we make the economic choices we do, will be anthropology and sociology studying human social behavior, and biology and ecology studying the environment.

To expand: If we are to include utility in our economic theory we must necessarily arrive at coefficients of utility. In a money economy, we find ALL exchangeable goods are thermodynamically equal. One can always sell the Picasso and buy a coal mine. This seems to a fundamental but largely unnoticed identity.

The utility of basic commodities is inelastic. Prices generally follow classic supply/demand models closely. The coefficient of utility is 1. If one wants to judge the utility of a bushel of corn, look at the price.

Elsewhere, with the price of Picassos and so forth, utility has no separable meaning. In an elastic market we see that the coefficient also must be 1.0. Things that are equal to the same thing are equal. One Picasso = One Coal Mine Price = Utility

I agree that much of neoclassical economics loses its relevance once we escape the world of markets for basic commodities which are bought and sold every day – in other words, once we start studying capitalism, with its financial sector, services, luxury goods and so forth.

However I am not entirely sure what you mean by price = utility. Surely price depends on a number of factors – production conditions, market power, the state of the economy – as well as demand?

Price = Utility In a market where the value of things is determined by multiple, often subjective factors, and where one can readily exchange any economic value for an equivalent amount of a basic commodity, the only meaningful measure of the utility of something is its price.

We can measure the utility of the basic commodity in BTU’s or Kilowatts, for everything else there can be no separate, non-subjective utility value other than its exchange value..

Utility is not a seperable, economically definable property of non-commodity goods.

I think Phil Dunn’s comment #69 in response to Robert Vienneau is spot on.

As for

“One may well disagree with the premise that labour is the source of value (I do, simply because I have no positive reason to believe it)”

how about the following from the dogmatic orthodox Marxist who used to head the Federal Reserve:

“faster productivity growth keeps a lid on unit costs and prices. Firms hesitate to raise prices for fear that their competitors will be able, with lower costs from new investments, to wrest market
share from them.

“Indeed, the increased availability of labor-displacing equipment and software, at declining prices and improving delivery times, is arguably at the root of the loss of business pricing power in
recent years.”

I agree that a lot of factors, such as those quotes, and the fact that capital reduces to labour, and the fact that without labour, nothing would be produced, all lend a lot of credence to the premise of the LTV.

However, I’m still looking for that ‘gotcha!’ moment where it all clicks together.

To complicate your life more, let me say that I think that the last 2 factors you mention are bad arguments.

The fact that without labor, nothing would be produced, doesn’t imply that labor is a source of value, much less the unique source. First, recall that in Marx’s theory, physical production and creation of value are different things, and in most societies there is physical production but no creation of value. Second, lots of things are necessary for physical production: if there were no sun, nothing would be produced, is there were no means of production, nothing would be produced. But that doesn’t imply that the sun or means of production are sources of value; in Marx’s theory, they aren’t.

As for “capital reduces to labour,” you might be referring to physicalist-simultaneist “reduction to dated labor” formulas. They don’t reduce capital to labor, actually, because they assume that the exact same technology, the current one, has been in existence since Adam. Without that implicit assumption, they just don’t work. And I’m convinced that Marx had a single-system theory, in which the value of means of production (and thus the amount of labor needed to produce them) just doesn’t matter insofar as the determination of outputs’ values are concerned. The amount of value currently needed in order to acquire the means of production, and thus the *current price* of the means of production, is what matters.

I don’t think there will be a “gotcha!” moment because you’re looking for an argument that makes it logical necessary, and maybe physically necessary as well, that labor is the unique source of value. You’re of course not the first to do so. It’s always struck me as a very weird demand. People don’t make such demands of other theories or explanatory principles. Theories are things that explain, not things to be explained. Since their purpose is to account for phenomena, their success or lack thereof needs to be assessed in terms of how well they account for phenomena, not in terms of how subjectively satisfying they are (quantum mechanics would be judged a dismal failure if that were an accepted criterion of assessment).

Marx proposed that the success of Capital depends on how well it accounts for phenomena–“the life of the subject-matter is reflected back in the ideas.”

Maybe your “gotcha!” moment can be the realization that we’re dealing with a theory like any other?

Yeah, that’s a fair point, and one stated by Hedlund above. Ultimately what I think about labour being the ultimate source of value doesn’t matter; what matters is the evidence.

Also, interesting point about holding technology constant in Sraffian models. You know, I doubt sraffa missed this – he was an impressive intellect – so it just affirms my belief that his model was only meant as a critique of neoclassical economics.

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